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Rio Tinto brinkmanship

Written By: - Date published: 8:38 am, July 2nd, 2015 - 58 comments
Categories: national, same old national - Tags: ,

tiwai

In August 2013 National announced the payment to Rio Tinto of $30 million to persuade the multi national corporation to continue with its contract to purchase electricity from Meridian Energy.  Many thought at the time that the payment was cynical manipulation by Rio Tinto of the Government at a time where the cancellation of the electricity supply contract would have played havoc with the Government’s asset sale programme.

The payment may have saved 800 jobs for a couple of years.  But Rio Tinto are now engaged in what looks like further brinkmanship and I expect the intention is to obtains more corporate welfare.

From Radio New Zealand yesterday:

New Zealand Aluminium Smelters had the option to end its power contract with Meridian Energy from today, but both sides have now agreed to delay any decision until 3 August.

As part of the $30 million government grant it received to stay open two years ago, New Zealand Aluminium Smelters was given until today to decide on its future – and that of the 800 people it employs.

Meridian’s chief executive Mark Binns said the smelter’s owner had been in talks with electricity companies, including Meridian, about its power needs, and wanted more time to consider its options.

“Although we are some way away from any sort of deal we think there are elements that are worthy of further discussion and we’d like to think it was possible that a deal could be put together inside that time frame if it was worthy of our investing more time in the whole matter.”

This post from two years ago by James Henderson makes a persuasive case for the Government to have said no.  If Tiwai’s power was no longer required then the most expensive electricity generation could be mothballed and prices would come down dramatically.  This may hurt shareholders of the power companies but that is the nature of a market.

And how is Tiwai Point performing lately?  Not bad according to Rio Tinto’s last annual report.

The Tiwai Point smelter in New Zealand, also part of the Pacific Aluminium cash-generating unit, is currently profitable as a result of high regional and product premiums and operational cost improvements; however, operational uncertainties indicate that the impairment losses previously recognised are yet to reverse.

Andrew Little’s comments on the issue is spot on.

It’s not good enough that after two years of negotiation between Meridian Energy and Rio Tinto there is now another delay until August.

The 800 workers at Tiwai deserve better as this whole mess has been created by the Government’s inept negotiations in 2013.

They used taxpayers money to bolster Meridian Energy which was about to be sold off as part of the Government’s asset sales programme.

We must never allow the events of 2013 to happen again. That brazen exercise in corporate welfare saw Rio Tinto get $30 million, its notice period halved and cheaper electricity.

Tiwai Point is just another example of the Government’s terrible negotiating skills. We have seen it again and again with SkyCity, Warner Brothers and the State Housing sell off.

Of course current circumstances are different and the Government is presumably less inclined to make any payment.  But you have to question the decision two years ago to pay the $30 million to Tiwai Point.  The extra couple of years bought appear to be well and truly gold (or is that aluminium) plated.

58 comments on “Rio Tinto brinkmanship ”

  1. BM 1

    Over the top stuff from Andrew Little again( or whoever write his press releases)

    He really needs to get that under control, makes him look like a raving mad man.

    As we all know, Andrew Little would have done exactly the same thing as National.

    The ex leader of the EMPU would not make a decision that would cause the loss of 800+ jobs.

    • Oh, bollocks. As the ex-head of the EPMU, Little actually knows how to negotiate. Clue, it’s not taking the other guy’s wishlist, saying yes and then adding a few more million on top as a sweetener.

      • BM 1.1.1

        Really?, so you’re saying that Andrew Little would have had no issue in closing Tiwai point and putting as Lanthanide said 1000’s out of work.

        I really really doubt that.

        Facts are Rio Tinto are a pack of arsholes that used a situation to fuck over NZ, they’re out the door next time, if they try that again.

        • mickysavage 1.1.1.1

          He would not have privatised Meridian which gave Rio Tinto the perfect leverage to demand the payment.

        • te reo putake 1.1.1.2

          Nope, not saying that at all, as I’m sure you know. Little would have negotiated and presumably done a deal. He wouldn’t have just rolled over, as the Key Government did for Warners, Rio Tinto and that bloke in Saudi Arabia who’s still laughing at how easy Key is to con.

          • BM 1.1.1.2.1

            Little would have negotiated and presumably done a deal

            What, like a 30 million government grant?

            • te reo putake 1.1.1.2.1.1

              Nope. I said he would have negotiated, not just rolled over. You do know what negotiation is, doncha?

              • Lanthanide

                TRP you’re assuming that the government did just “roll over” and hand over $30M without doing any negotiation at all.

                Do you have any actual evidence to support that this is what happened? Note: opinion is not evidence.

                • Do you have any evidence that it isn’t exactly what they wanted? No, no you don’t. Key, as usual, backed himself into a corner and had to fold because if he didn’t his pimping of our assets would have flopped. The guy cannot negotiate. It’s not in his nature or his skill set.

                  This Government is hooked on the philosophy of corporate welfare. If Kiwi citizens are in trouble … fuck ’em. If business needs a handout … let me get the taxpayer chequebook.

                  • Lanthanide

                    So no evidence, then, that National “just rolled over”. Just opinion.

                    • Huh? And your evidence to the contrary is what, exactly? Of course it’s an opinion, just as yours is. But mine is an opinion widely shared. In a nutshell, Key buggered it up because his privatisation program was at risk if he didn’t buy Rio Tinto off.

                      If Labour was in power at the time, Rio Tinto would not have had the leverage because there would not be any pending privatisations. So, Key had to roll over. He left himself no choice.

                    • Lanthanide

                      Yesterday you asked CV for a cite, which he couldn’t provide. Seems what’s good for the goose is good for the gander.

                      At least you’ve admitted it’s an opinion, though.

                      [I never claimed it as fact. It was always an opinion, as just about every post and comment on this site is. Take this as a warning. Any more failed smart arsery and you’re off. TRP]

                    • Brendon Harre

                      Lanthanide. If we remove the emotive language. The facts are there was an negotiation between Rio Tinto a highly profitable international company and the government. The conclusion of the negotiation was the government agreeing to subsidise Rio Tinto $30 million in return for Rio Tinto agreeing to keep Tiwai Point open for 2 years.

                      None of this is opinion -these are the facts.

                      This sort of subsidy of the private sector has been considered inappropriate since the Muldoon era.

                      You can dispute some of the colourful language, such as whether National “just rolled over”. But really the facts speak for themselves.

              • Old Mickey

                Many sorts of negotiation, and in this case Rio Tinto holds all the winning cards. Unless their demands are met, they will pack up and move.

                • BM

                  Exactly, it was all down side for National, they had nothing to negotiate with.

                  For me , it demonstrated what a bad faith business partner Rio Tinto is.

                  They couldn’t give a shit about NZ.

                  • Brendon Harre

                    Of course there is an upside for NZ. Rio Tinto actually has a weak hand, it was only the poor negotiating skills of John Key and Bill English that gave them a $30million subsidy from the taxpayer.

                    If Rio Tinto buggers off. NZ still retains the electricity and that electricity is put back on the market, lowering the price which would benefit lots of small consumers and businesses. These lower electricity prices for the whole country would easily create 1000s of jobs.

                    The government now and Andrew Little in the future if faced with a similar situation need to stand up to the fat cats demands and think about the little guy.

                    • Tracey

                      kind of like nationalisation but without an edict

                    • You_Fool

                      The main question for me is if Rio Tinto decide to bugger off, what happens to the smelter? Can it be brought for a reasonable price and then run (SOE just to annoy the RWNJ) which will recreate those jobs, and we have a profitable business still in NZ.

                      Of course the fact that that would never happen (because it is making money) means that Rio TInto will fold if heat is put back on them….

                  • Tracey

                    “For me , it demonstrated what a bad faith business partner Rio Tinto is.

                    They couldn’t give a shit about NZ.”

                    we agree, except for the business partner bit. They are not a business “partner” of NZ

                • True. Never take a blunt knife to a gun fight.

                • Draco T Bastard

                  I really wish they would. We’ve been subsidising Tiwai Point ever since somebody thought it up in the 1960s.

    • Tracey 1.2

      “is currently profitable”

      Do you know where that profit went BM?

  2. Lanthanide 2

    “The payment may have saved 800 jobs for a couple of years.”

    Apparently there are 3,500 jobs directly or indirectly dependent on the smelter staying open.

    “Of course current circumstances are different and the Government is presumably less inclined to make any payment. ”

    Key’s explicitly ruled out any further support.

    Share prices in the electricity companies have dropped by 10-20% over the last couple of months due to the uncertainty around the smelter.

    My suspicion is they’ll keep it open, exercise their option to keep buying 400 MW from Meridian and go to the market for the remaining 172 MW they need.

    • Tracey 2.1

      I heard Shadbolt use that figure too Lanth. Also factor in that Southland is dairy country and they are facing a downturn right now too…

    • dukeofurl 2.2

      That 3500 jobs is way too high.

      “Over my many years as head of the National Association of Manufacturers and later the Manufacturing Institute, we made much use of our study showing that the average manufacturing multiplier is 1.58.”
      http://www.huffingtonpost.com/jerry-jasinowski/jobs-multiplier_b_4002113.html

      This is for much more intense manufacturing than smelting. The raw materials arrive in bulk by sea, the production lines are not very labour intensive unlike a lot of manufacturing.

      But using the 1.58 factor we get 1260 indirect jobs when you have 800 work force.

      And it seems that the production has peaked and numbers could be lower than that now.

  3. repateet 3

    The previous chapter of the Rio Tinto brinkmanship was followed shortly after by the announcement of the international profit of Rio Tinto.

    How many billions was it?

    • NZSage 3.1

      +1000

      We really do need a like button on this blog.

    • Marvellous Bearded Git 3.2

      From the Rio Tinto accounts for 2014:

      “Achieved underlying earnings [profit] of $9.3 billion….”
      “These represent a total cash return to shareholders, in respect of 2014, of almost $6.0 billion…..”

      So the company felt able to give its shareholders US$6 billion, about NZ$9 billion.
      They really needed that $30m from Key/English.

  4. Marty 4

    Perhaps they should let it close and if indeed 3500 people lose their jobs then I suggest move them all to Wellington where they can be tasked with coming up with a solution to the state housing sell-off. Bet they can do better than offer them to an Australian charity.

  5. Marvellous Bearded Git 5

    $30 million is the tip of the iceberg.

    The real cave-in during the 2013 negotiations was over the price of power supplied to Rio Tinto. The previous deal over power prices finished in 2013. Meridian, in secret negotiations over a new long-term contract for power for Rio, according to media at the time, caved-in and gave the smelter cheaper prices for power than originally proposed in the new contract. This almost certainly cost much more than, and is additional to, the $30m headline figure, though the government will never release the figures hiding behind commercial sensitivity.

    Andrew Little and Mathew Hooton agree that National stuffed-up the negotiations with Rio. That is a pretty wide political spectrum of criticism suggesting this was a major cock-up by Key and English.

    • Brendon Harre 5.1

      As per my above argument if NZ allowed Rio Tinto to bugger off that electricity and lower price contracts would be available to ordinary consumers, including small businesses and would easily lead to thousands of extra jobs. It is not just the $30million of taxpayer subsidies at stake.

      Really like so many other issues in NZ this boils down to whether you support the big end or small end of town. It is the same thing with housing affordability, charter schools, social bonds to care for the mentally ill, milk prices, democracy for Canterbury, convention centres nationally and the rebuild in Christchurch, Sky City deals……

    • dukeofurl 5.2

      The NBR talks about a total concession of $1 bill over the life of the contract, including the $30 mill golden handshake and price reductions

  6. Paul Campbell 6

    I don’t think one really needs to question the $30m payment – there was an election coming it was pure electoral politics, putting the decision off untill there wasn’t an election looming was a no brainer for Key (of little brain).

    I can’t think of anything better for NZ than dumping lots of clean cheap carbon-free electricity on the national grid – electric cars will become more viable, cold houses will be able to be heated, new industries will spring up – if some of the people who bought shares in National’s sell off lknowing this was in the offing loose some money tough

  7. Nigel 7

    This winding down of economic activity worldwide just gets worse and worse. One persons “costs” are someones customers.

    We would all agree with this but don’t act like we understand.

    Governments can never balance a budget, only cut spending and so reduce their own tax take. We are seeing the result of this circular cutting of spending and reducing “costs”.

    Greece is a perfect example of killing their ability to earn a living through fiscal “responsibility”.
    We all know modern currency is debt and so it’s time we acted like we know it.
    I’m sure our government think they are doing the right thing with Rio Tinto, but the results just get worse.

  8. Stuart Munro 8

    World aluminium prices are recovering and are expected to rise until 2017 when new Indonesian smelting capacity comes on line. Rio Tinto don’t need a lolly this year.

  9. Tamati 9

    So when Labour calls for it, it’s “regional development” , but when National does it it’s “corporate welfare”.

    • dukeofurl 9.1

      Its not ‘development’ when they have been running for 30 years.

      And yes it is different when one party is all for ‘private enterprise’ except when it isnt.

      Cant wait for the year after next ( election year) when the dairy farmers will have to be bailed out.

      The Reserve Bank has started down that track by cutting interest rates which leads to fall in kiwi dollar and improves returns to farmers and lowers their interest rates.

      But it wont be enough as the 14,000 dairy farmers collectively owe about 20% of what Greece owes !

      • Tamati 9.1.1

        Both are advocating for handouts to businesses in regional New Zealand. This is no different from Labour calling for subsidies to the Hillside workshops in Dunedin.

        • McFlock 9.1.1.1

          Apart from the fact that hillside was government owned, and the options were to keep a good local facility working vs sending good money overseas in exchange for shonky asbestos-riddled shit.

          Fuck it – nationalise the smelter: best of both worlds, if it’s a going concern. If it’s not, then we might as well use the millions and scrap proceeds to subsidise a genuine long term asset for Southland.

  10. b waghorn 10

    In some ways is not the government s negotiating with a big company to secure 800 direct jobs plus another 1000or so flow on jobs a form of socialism . ?

    • Gosman 10.1

      Short answer yes.

    • dukeofurl 10.2

      Its never stopped them before, when its workers futures on the line.

      But this time its the big power companies who will have their share price decimated, thats the reason for the delay, to give a bit more cover for the sale of half shares in the big 3, some of which was stretched out over a year.

      • b waghorn 10.2.1

        Yes I bet the share holders shitting and I certainly don’t trust the nats motives but it would devastate another region if reo tinto goes .

  11. jaymam 11

    I understand that the taxpayer subsidy of Tiwai is so high that it would be cheaper to give all the workers $200,000 per year to sit at home and do nothing.
    That being the case, shut down Tiwai and string up some more wires and use the power for the rest of NZ, then no gas or coal need be burned to generate power. NZ would have 100% renewable power and we can tell the rest of the world that we have more than achieved our emissions target and why don’t they match us.
    We will all have cheaper power. Where’s the downside? Apart from those with shares in power companies, which isn’t me.

    • Oel 11.1

      I don’t think the effect on the companies would be even – some of the generators would suffer a lot and some a lot less, depending of their customer numbers, contracts etc. Some shareholders will benefit and some will suffer.

      For example and somewhat ironically, it would hit New Zealand wind farms very hard, because they purely rely on the wholesale market, and are presently incurring quite large maintenance costs for Te Rere Hau, in the order of say $50/MWh. However, you’d have to say that the immediate consequence would be a fast tracking of the decommissioning of the remaining Huntly steam turbine units. Contact would also be looking hard at one of its CCGTs, so possibly you would see the exit of up to 900MW of thermal generation from the market, which has got to be a good thing.

  12. Iron Sky 12

    Hummm, I hate to say it, but what about this:

    1.
    http://www.electric-vehiclenews.com
    Nissan plans a midcycle update as early as August that aims to deliver a big increase in the Leaf’s driving range.The improvements will come from increasing the battery capacity from the current 24-kilowatt-hour power pack to 30 kWh. The increase will boost range to 200 km (125 miles).

    +

    1.
    Nissan plans a midcycle update as early as August that aims to deliver a big increase in the Leaf’s driving range.The improvements will come from increasing the battery capacity from the current 24-kilowatt-hour power pack to 30 kWh. The increase will boost range to 200 km (125 miles).

    = 3

    RIO …. see the connection perchance? could be wrong……..

  13. Iron Sky 13

    3 = While details are yet scarce, yesterday Phinergy CEO and Founder, Aviv Tzidon confirmed talks with Renault-Nissan are tentatively set for a proposed series production electric car due in 2017 using its range-extending aluminum-air battery.

    YUP ALUMINIUMMMMMMMMMM

    http://www.hybridcars.com/renault-nissan-to-use-phinergys-aluminum-air-battery/

    NZ has lots of electricity and apparently an aluminium smelter to die for.

  14. RedBaronCV 14

    And if Rio Tinto want another subsidy then obviously the smelter is not profitable so they should be pleased to sell it for whatever they can get. A bit of crowd sourcing should get the ten bucks together. What they won’t sell for that – must be making money then.

    • Stuart Munro 14.1

      It is a good idea – but running an aluminium smelter is not quite a walk in the park, and as the gulf finishes commissioning and Indonesian smelters come online maintaining profitability will become difficult. Especially since large companies like Rio Tinto will probably manipulate alumina prices to the point that Tiwai is marginal.

      Our local advantage is not energy price but if as a country we use the smelter to smooth generation capacity – and develop a range of finished aluminium industries. The Gnats are basically peasants – don’t understand that kind of thing at all. And Labour… are no longer the repository of metallurgical knowledge they might once have been.

      The Greens might recognise things like the parallelism of anode curing with carbon fibre manufacture – but the carbon footprint of any aluminium smelter might deter them from developing or optimising the kind of light industry sector that should form around such a key resource.

  15. philj 15

    Is this what is meant by a PPP? The Government helps out struggling multi nationals? Half price electricity sounds like a great deal for rich and poor throughout the land. Pity the investors who bought in. lol

  16. Oel 16

    The whole market structure is ridiculous, and prone to distortions. This is a prime example – the market is floundering around trying to find a cheap way of supplying 172MW. Meanwhile Contact Energy is considering what to do with two of the most efficient gas turbines in the country (otahuhu b and tcc). Ccgt of such ilk typically have a minimum load of between 160 – 200MW. The old nzed wouldn’t have needed years of negotiations to join the dots about what the best solution is here …

  17. Andrew Wallace 17

    Does anyone have an accurate figure on the price per kilowatt/hour Rio Tinto has been paying Meridian since the renegotiation in 2013?

    • Oel 17.1

      I don’t think the figure has ever been published officially, but I guess given that the negotiations are proving to be difficult to secure the additional 172MW with Genesis / Contact / MRP then it can be inferred that the cost is probably close to the cost to run the power stations that would be used to supply the additional power. So I would guess that the cost is approximately the short run marginal cost of a CCGT, which is around $80/MWh or 8c/kWh, plus or minus say 1c/kWh depending on what price they get the gas for etc etc. Not bad eh? Would be nice to get the power for my house at that rate 🙂

      I guess there is also the benefit for the generation companies of effectively removing 172MW generation from the wholesale market, as it would be contracted to Rio Tinto, pushing the price up.

  18. Smilin 18

    IF its not profitable to produce aluminium let it fail Key shut down Hillside what’s the problem with pullin the pin on Rio Tinto
    Oh thats right they’ve got us over a multinational barrel of imperial graft and corruption and probably donate significantly to the national party apart from being probable shareholders in Meridian any other thoughts about this piece of scumbag protectionism ?
    We could do with having the power in the grid anyway to balance what AK sucks

  19. lulu 19

    None of the commentators connect the delay of the announcement with the “possibility of transmission pricing changes which could save Tiwai about $50m a year” (refer Stuff). While it is not a done deal, if the Electricity Authority land on the currently proposed new transmission pricing methodology Rio wouldn’t get a single payment of $50m they would receive an annual saving of $50m. The new proposed methodology was announced June 16, just 2 weeks before the delay on the outcome of negotiations was announced. No surprise that they needed a bit more time to decide whether this possible windfall is bankable.

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